However, one way Germany could prevent a downwards economic
spiral is to let go of austerity and loosen fiscal policy.

Not only could they afford to, thanks to a deficit that's well
within Euroland norms, this would also be politically
palatable. From Weinberg:

"We believe the biggest surprise for traders and investors this
year will be a dash of deficit spending to stimulate demand,
initiated in the current quarter to yield fruit by elections next
fall. Having achieved substantial austerity and reduced its
operating deficit to well within Euroland norms, Germany’s
government has the scope to increase its deficit by 1-to-2% of
GDP. This would likely improve the sitting government’s
reelection chances."

Of course, if Germany were to loosen fiscal policy, it would
really upset its neighbors. After all, they've been pushing for
higher taxes, trimming public sector spending and cutting
entitlements in pretty much every Eurozone country there is.

Beyond that, the only real tangible disadvantage of loosening
fiscal policy could be that interest rates for German bonds would
likely start trending upwards. But this would probably happen
anyway.

"Deficit spending by Berlin would surely steepen the Bund yield
curve," wrote Weinberg. "This would happen anyway, since
Bunds pay zero real yield, which cannot persist in a normal
world. Policy will only accelerate the correction of yields to
more normal levels."